Do Barclays’ tech woes highlight a growing risk for bank shares?
It has not been a great few days for Barclays (LSE: BARC), with the company’s retail arm suffering from widely-publicised technical problems on a grand scale. Still, given that Barclays’ shares are up 98% over the past year alone, at least its investors are laughing… all the way to the bank.
I do not own shares in Barclays, or indeed any British bank right now. That is because one risk I see is a weak economy leading to higher loan default rates, hurting profits.
But I am increasingly concerned by a different, long-term risk I think the recent Barclays debacle highlights.
Voluntarily sacrificing competitive advantage
If an app goes down, having a physical network of branches can really come into its own. It might not though. An offline app, or one not working correctly, can be symptomatic of wider technical problems that also affects branches and cash machines.
Sometimes however, having a branch network can be really helpful for customers. That is one competitive disadvantage I see in purely digital financial services providers.
Meanwhile, banks with branch networks increasingly see them as a competitive disadvantage due to the costs involved. Just last month, Barclays closed branches in towns from Barnard Castle (County Durham) to Ystrad Mynach (Wales). British banks have dramatically reduced their physical footprint in the past decade and that looks set to continue.
Might banks struggle versus pureplay digital rivals?
The problem is, I am not convinced that legacy banks have the right skill set or motivation to compete in digital platform provisions as well as more focused rivals. HSBC recently announced plans to close its international payment app Zing, even though it only launched last year.
Is that because the international payment market is unattractive? I do not think so. Wise has an £11.3bn market capitalisation and in its most recently reported quarter was used by over 9m customers.
There is an ongoing massive growth opportunity for digital firms like Wise and Revolut. Not only can they charge customers for money transfers, there are also profit opportunities in the difference (‘spread’) between exchange rates used in certain transactions and lending customer deposits out at higher interest rates than they pay.
In other words, such firms could eat the lunch of traditional banks. In the long run, that could be very bad news for revenues and particularly profitability at long-established banks.
What I’m looking for when assessing bank shares
Banks have big competitive advantages, which include strong brands, large customer bases and a physical presence that can offer customers convenience and reassurance.
Metro Bank and building societies like Nationwide have been focusing on those strengths, albeit with mixed results. Meanwhile, FTSE 100 banks including Barclays, NatWest and Lloyds have been going in the other direction.
HSBC’s recent experience shows that competing with purely digital platforms is hard work. I am not convinced large retail banks have the optimal cost structure to do so. Slashing costs like branch networks might seem smart, but I fear it could just eat into their existing competitive advantages.
I could be wrong and Barclays may go from strength to strength.
But I always look for a competitive advantage when buying shares. Long term, I find bank shares like Barclays and Lloyds unattractive given their strategy, and will not consider buying them.
The post Do Barclays’ tech woes highlight a growing risk for bank shares? appeared first on The Motley Fool UK.
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C Ruane has positions in NatWest Group Plc. The Motley Fool UK has recommended Barclays Plc, HSBC Holdings, Lloyds Banking Group Plc, and Wise Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
